Scrimping on insurance cover can be a false economy

Four years ago this week, Buncefield exploded its way into the headlines as the site of the largest peacetime fire in European history. Even now, businesses disrupted by the effects of the explosion are still fighting for compensation.

The only thing more shocking than this is how foolhardy many businesses are in assessing their recovery prospects, were disaster to strike. If it does, even smaller businesses can find that suddenly they are fighting hard for millions of pounds of compensation for lost revenues, customers and growth.

All too often, businesses consider that the risk of a Buncefield-style event is remote. Even businesses that accept that a disaster is possible often under-assess the time it will take them to recover. These assessments lull companies into limiting their business interruption cover and, although this can keep premiums down, it can be a false economy.

Businesses often select indemnity periods of 12 to 18 months when, in reality, three years would be much more appropriate, particularly if a business has seasonal peaks and troughs. Companies can also suffer if their policies define items such as gross profit, wages and salaries costs in archaic ways.

When a claim arises, the initial financial battle is between the insured party and the insurer. Insurers often seek to reduce claims because they are unsure whether a subsequent claim against the party responsible for the incident will recover the amount they paid out. Understandably, the insured party can be shocked by this, not seeing this as a relevant issue. Things become more complex again when the insured party and the insurer join forces to claim against the party responsible for both insured and uninsured losses.

If businesses insure for longer, more appropriate indemnity periods, their uninsured losses will be a smaller element of any claim. Furthermore, the insurer may be more co-operative in terms of payments and other steps to assist the insured party to recover as quickly as possible.

The availability of evidence regarding present and future business activity – how the business would have performed but for the incident – can be a serious problem. Obviously, management accounts, budgets and forecasts are important, but so are records of actual contract negotiations and everyday activities with actual and potential customers and suppliers.

The more evidence is available, the easier it is for a business to establish its “but for” position. Off-site backups for general e-mails and commercial proposals are as important as those for key financial records. Post-incident, it is vital to keep records not only of actual expenditure on an itemised basis but of all key commercial events so that the true impact of the incident is demonstrable.

Recent events have given businesses a sharp lesson in external risk management. However, they must not overlook the risks lurking under their own roofs. If they recognise these, select realistic indemnity periods and relevant insurance policies, and maintain thorough back-up systems beyond basic accounts, they will have the best chance of surviving should the improbable become reality.

Jeffrey Nedas is a forensic accountant and the founder of Jeffrey Nedas & Co, chartered accountants

Read Jeffrey Nedas’s article on The Times website

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